What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-09 · 332 added, 289 removed, 453 unchanged (58% of the section changed)

12 unchanged sentences

The Company uses the best information available to make the estimations necessary to value the related assets and liabilities in each of these areas.

Investment Securities

Investment securities are classified as held-to-maturity or available-for-sale.

Management determines the appropriate classification at the time of purchase.

The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities.

Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity.

Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss) and do not affect earnings until realized unless a decline in fair value below amortized cost is considered to be OTTI.

The fair values of the Company’s securities are generally determined by reference to quoted prices from reliable independent third party sources and pricing services utilizing observable inputs.

The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if OTTI exists.

In evaluating the possible impairment of securities, consideration is given to the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings.

If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors.

The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.

The amount of the OTTI related to other factors will be recognized in accumulated other comprehensive income (loss), net of tax.

The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment.

If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date.

Any recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in shareholders’ equity) and not recognized in income until the security is ultimately sold.

Allowance for Loan Losses

14 unchanged sentences

The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans.

Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired with measurement of impairment as described above.

Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired with measurement of impairment as described above.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

8 unchanged sentences

concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

Income taxes are accounted for under the asset and liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.

Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.

Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

A valuation allowance is established to reduce the deferred tax asset to the level at which it is more likely than not that the tax benefits will be realized.

Realization of tax benefits of deductible temporary differences and carry-forwards depends on having sufficient taxable income of an appropriate character and in the appropriate periods.

Executive Summary

The Company delivered consistent financial performance for the year ended December 31, 2019 , despite the decreasing interest rate environment, strong competition in its target markets and regulatory challenges.

Net income was $24.1 million for the year ended December 31, 2019 , a decrease of $193 thousand , or 0.8% , from $24.3 million for the year ended December 31, 2018 .

Net income was $16.2 million for the year ended December 31, 2020, a decrease of $7.9 million, or 32.9%, from $24.1 million for the year ended December 31, 2019.

The decrease was primarily due to an increase in provision for loan losses and a decrease in net interest income.

Provision for loan losses increased primarily due to the increase in risks associated with economic and business conditions, as well an increases in special mention and substandard loans, as a result of the COVID-19 pandemic, and net interest income decreased primarily due to the lower market rates during the year ended December 31, 2020.

For the year ended December 31, 2019, net income was $24.1 million, a decrease of $193 thousand, or 0.8%, from $24.3 million for the year ended December 31, 2018.

The decrease was primarily due to increases in provision for loan losses and noninterest expense, partially offset by increases in net interest income and noninterest income.

Provision for loan losses increased primarily due to increased charge-offs and noninterest expense increased primarily due to expansion of the Company's infrastructure for being a public company and enhancement of the controls and processes on BSA and AML (“BSA/AML”) compliance during the year ended December 31, 2019 .

Provision for loan losses increased primarily due to increased charge-offs and noninterest expense increased primarily due to expansion of the Company's infrastructure for being a public company and enhancement of the controls and processes on BSA/AML compliance during the year ended December 31, 2019.

Net interest income increased primarily due to the loan growth and higher average market rates and noninterest income increased primarily due to higher sales of loans and securities available-for-sale during the year ended December 31, 2019

For the year ended December 31, 2018 , net income was $24.3 million , an increase of $7.9 million , or 48.1% , from $16.4 million for the year ended December 31, 2017 .

The increase was primarily due to an increase in net interest income, and decreases in provision for loan losses and income tax expense, partially offset by an increase in noninterest expense and a decrease in noninterest income.

Net interest income increased primarily due to the loan growth and rising interest rates and provision for loan losses decreased primarily due to a decrease in historical loss rates, which partially offset by loan growth, during the year ended December 31, 2018 .

Income tax expense decreased primarily due to the Tax Cuts and Jobs Act.

Noninterest expense increased primarily due to the Company's continued growth and additional expenses related to IPO and noninterest income decreased primarily due to decreases in sales volume and premiums on SBA loans during the year ended December 31, 2018 .

Total assets were $1.92 billion at December 31, 2020, an increase of $176.5 million, or 10.1%, from $1.75 billion at December 31, 2019.

The increase was primarily due to an increase in loans held-for-investment and a recognition of operating lease assets, partially offset by decreases in cash and cash equivalents and investment securities.

During the year ended December 31, 2019 , the Company focused on expanding its relationship with middle-market companies and increased its commercial lines of credit by $19.8 million, or 21.5%.

The Company also expanded its SBA originations by hiring additional business development officers and increased its SBA loans by $7.1 million, or 4.8%, despite the increase in sales of SBA loans of $7.9 million, or 8.6%, for the year ended December 31, 2019 .

The Company is committed to making corporate decisions that directly benefit its shareholders, and during the year ended December 31, 2019 , increased its dividend per common share by $0.13, or 108.3%, to $0.25 from $0.12 for the year ended December 31, 2018 .

The Company also completed the publicly announced $6.5 million share repurchase program from its commencement in March 2019 to October 2019.

Overall, the Company returned 43.3% of its earnings to common shareholders through dividends and common share repurchases.

The increase was primarily due to an increase in loans held-for-investment and cash and cash equivalents.

Loans held-for-investment increased primarily due to the SBA PPP loan production and cash and cash equivalents increased primarily due to increases in deposits and borrowings as the Company maintains most of its cash at the Federal Reserve Bank account.

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets;

global supply chain disruptions;

and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the U.S., but also specifically in California, where most of the Company’s operations and a large majority of its customers are located.

Since the beginning of the crisis, the Company has taken a number of steps to protect the safety of its employees and to support its customers.

The Company has enabled its staff to work remotely and established safety measures within its bank premises and branches for both employees and customers.

In order to support its customers, the Company has been in close contact with its customers, assessing the level of impact on their businesses, and putting a process in place to evaluate each client’s specific situation and provide relief programs where appropriate.

SBA PPP loans totaled $135.7 million (1,585 loans) and loans with modifications related to the COVID-19 pandemic totaled $36.1 million (39 loan customers) as of December 31, 2020.

In December 2020, the Company received SBA PPP forgiveness of $1.8 million for 57 SBA PPP loans.

On January 13, 2021, SBA began accepting applications for (i) first draw PPP loans for businesses that did not seek a PPP loan under the original CARES Act, and (ii) second draw PPP loans for businesses that were extended a PPP loan previously.

The Company had funded 819 loans totaling $88.1 million by February 28, 2021 and will continue to receive applications as long as funding remains available.

In addition, the Company has been monitoring its liquidity and capital closely.

As of December 31, 2020, the Company maintained $194.1 million, or 10.1% of total assets, of cash and cash equivalents and $526.1 million, or 27.4% of total assets, of available borrowing capacity.

All regulatory capital ratios were also well above the regulatory well capitalized requirements as of December 31, 2020, while establishing additional provision for loan losses of $13.2 million for the year ended December 31, 2020.

At this time, the Company cannot estimate the long-term impact of the COVID-19 pandemic, but these conditions impacted and are expected to impact its business, results of operations, and financial condition negatively.

Financial Highlights

• Net income was $16.2 million for the year ended December 31, 2020, a decrease of $7.9 million, or 32.9%, from $24.1 million for the year ended December 31, 2019;

◦ The Company recorded a provision for loan losses of $13.2 million primarily due to an increase in the economic uncertainty, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020.

◦ Diluted earnings per common share was $1.04, $1.49 and $1.65 for the years ended December 31, 2020, 2019 and 2018, respectively.

◦ Net interest margin was 3.53%, 4.11% and 4.23% for the years ended December 31, 2020, 2019 and 2018, respectively.

• Total assets were $1.92 billion at December 31, 2020, an increase of $176.5 million, or 10.1%, from $1.75 billion at December 31, 2019;

• Loans held-for-investment, net of deferred costs (fees), were $1.58 billion at December 31, 2020, an increase of $132.7 million, or 9.1%, from $1.45 billion at December 31, 2019;

◦ SBA PPP loans totaled $135.7 million at December 31, 2020.

◦ Loans with modifications related to COVID-19 totaled $36.1 million at December 31, 2020 compared with $484.0 million at June 30, 2020.

◦ Allowance for loan losses to total loans held-for-investment ratio was 1.67% at December 31, 2020 compared with 0.99% at December 31, 2019.

• Total deposits were $1.59 billion at December 31, 2020, an increase of $115.5 million, or 7.8%, from $1.48 billion at December 31, 2019;

Net income was $24.1 million for the year ended December 31, 2019 , a decrease of $193 thousand , or 0.8% , from $24.3 million for the year ended December 31, 2018 ;

Diluted earnings per common share was $1.49 , $1.65 and $1.21 , respectively, for the years ended December 31, 2019 , 2018 and 2017 .

Net interest margin was 4.11% , 4.23% and 4.22% , respectively, for the years ended December 31, 2019 , 2018 and 2017 .

• The consent order related to the Bank’s BSA/AML compliance was terminated on September 30, 2020;

• The Company declared and paid cash dividends of $0.40, $0.25, and $0.12 per common share for the years ended December 31, 2020, 2019 and 2018, respectively.

Result of Operations

6 unchanged sentences

Year Ended December 31,

($ in thousands)

Average Balance

2020 2019 2018

($ in thousands) Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost

Interest-earning assets:

Total loans (1)

$ 1,541,740 $ 76,546 4.96 % $ 1,383,562 $ 85,667 6.19 % $ 1,264,166 $ 76,837 6.08 %

Mortgage-backed securities 68,496 1,260 1.84 % 82,848 2,081 2.51 % 70,971 1,717 2.42 %

2 unchanged sentences

Municipal securities - tax exempt (2)

5,811 150 2.58 % 5,833 154 2.64 % 6,312 159 2.52 %

Interest-bearing deposits in other financial institutions 204,708 631 0.31 % 126,803 2,781 2.19 % 130,453 2,539 1.95 %

4 unchanged sentences

Allowances for loan losses (19,693) (13,197) (12,632)

Other assets 39,385 35,010 26,827

Total noninterest-earning assets 37,234 40,427 33,274

Total assets $ 1,914,824 $ 1,719,662 $ 1,589,333

Interest-bearing liabilities:

NOW and money market accounts $ 371,315 2,385 0.64 % $ 329,562 5,162 1.57 % $ 287,131 3,477 1.21 %

Savings 8,543 9 0.11 % 7,965 32 0.40 % 8,613 26 0.30 %

Time deposits 708,306 10,564 1.49 % 783,353 18,245 2.33 % 758,029 13,837 1.83 %

Borrowings 94,319 614 0.65 % 25,388 472 1.86 % 34,904 611 1.75 %

Total interest-bearing liabilities 1,182,483 13,572 1.15 % 1,146,268 23,911 2.09 % 1,088,677 17,951 1.65 %

8 unchanged sentences

Net interest spread (3)

3.10 % 3.44 % 3.73 %

Net interest margin (4)

3.53 % 4.11 % 4.23 %

Cost of funds (5)

0.81 % 1.62 % 1.27 %

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans.

Net amortization of deferred loan fees (cost) of $452 thousand , $515 thousand and $559 thousand , respectively, and net accretion of discount on loans of $4.0 million , $4.4 million and $3.5 million , respectively, are included in the interest income for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Net amortization of deferred loan fees (cost) of $2.9 million, $452 thousand and $515 thousand, respectively, and net accretion of discount on loans of $3.3 million, $4.0 million and $4.4 million, respectively, are included in the interest income for the years ended December 31, 2020, 2019 and 2018, respectively.

(2) The yield on municipal bonds has not been computed on a tax-equivalent basis.

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2019 Year Ended December 31, 2019 vs.

Increase (Decrease) Due to

Net Increase (Decrease)

Increase (Decrease) Due to

Net Increase (Decrease)

($ in thousands)

Increase (Decrease) Due to Net Increase (Decrease) Increase (Decrease) Due to Net Increase (Decrease)

($ in thousands) Volume Rate Volume Rate

Interest earned on:

Total loans $ 9,794 $ (18,915) $ (9,121) $ 7,257 $ 1,573 $ 8,830

Investment securities (937) (892) (1,829) 158 74 232

9 unchanged sentences

The following table presents the components of net interest income for the periods indicated:

Year Ended December 31,

Amount Change

Percentage Change

Year Ended December 31, Amount Change Percentage Change

($ in thousands) 2020 2019

1 unchanged sentence

Interest and fees on loans $ 76,546 $ 85,667 $ (9,121) (10.6) %

Interest on tax-exempt investment securities

Interest on investment securities 2,127 3,956 (1,829) (46.2) %

6 unchanged sentences

Net interest income $ 66,189 $ 69,034 $ (2,845) (4.1) %

Net interest income increased primarily due to a 7.9% increase in average balance of interest-earning assets and a 15 basis point increase in average yield on interest-earning assets, partially offset by a 5.3% increase in average balance of interest-bearing liabilities and a 44 basis point increase in average cost of interest-bearing liabilities.

The increase in average balance of interest-earning assets was primarily due to growth in the loan and investment security portfolios, supported by deposit growth.

The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to higher average market rates in 2019.

Interest and fees on loans increased primarily due to a 9.4% increase in average balance and a 11 basis point increase in average yield.

The increase in average balance was primarily due to organic loan growth primarily in commercial property loans and commercial lines of credit.

The increase in average yield was primarily due to the rising interest rate environment in 2018 and higher average market rates in 2019.

The Company had benefited from its high proportion of variable rate loans that had repriced along with such interest rate environment;

however, the Company strategically had increased the proportion of fixed rate loans to 43.4% at December 31, 2019 from 34.4% at December 31, 2018 in order to improve its asset composition to align with the current and potential future interest rate environment.

Interest on investment securities increased primarily due to a 4.2% increase in average balance and a 5 basis point increase in average yield.

The increase in average balance was primarily due to a steep increase in investment securities throughout 2018, which lead to a higher average balance in 2019, partially offset by a sale of investment securities of $32.8 million in December 2019.

The increase in average yield was primarily due to additional purchases of investment securities along with the rising interest rate environment in 2018 and higher average market rates in 2019.

Net interest income decreased primarily due to a 128 basis point decrease in average yield on interest-earning assets and a 3.2% increase in average balance of interest-bearing liabilities, partially offset by a 11.8% increase in average balance of interest-earning assets and a 94 basis point decrease in average cost of interest-bearing liabilities.

The increase in average balance of interest-earning assets was primarily due to growth in the loan and other interest-earning assets, supported by deposit growth.

The decreases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the lower market rates in 2020.

Interest and fees on loans decreased primarily due to a 123 basis point decrease in average yield, partially offset by a 11.4% increase in average balance.

The decrease in average yield was primarily due to the lower market rates, the 1% interest rate on SBA PPP loans, and a decrease in net accretion of discount, partially offset by an increase in net amortization of deferred fees on SBA PPP loans.

The increase in average balance was primarily due to the SBA PPP loan production as well as an increase in commercial property loans.

Interest on investment securities decreased primarily due to a 23.7% decrease in average balance and a 73 basis point decrease in average yield.

The decrease in average balance was primarily due to a sale of investment securities of $32.8 million in December 2019, which lead to a lower average balance in 2020, partially offset by new investment securities purchased in 2020.

The decrease in average yield was primarily due to new investment securities purchased at lower market rates, as well as the sales of securities available-for-sale in December 2019 with a weighted-average book yield of 3.02%.

The Company purchased $39.4 million and $14.1 million, respectively, of investment securities during the years ended December 31, 2020 and 2019.

For the years ended December 31, 2020 and 2019, average yield on total investment securities was 1.73% and 2.46%, respectively.

Interest income on other interest-earning assets increased primarily due to an 18 basis point increase in average yield, partially offset by a 2.0% decrease in average balance.

The increase in average yield was primarily due to a higher average federal funds rate in 2019, partially offset by a decrease in dividend on FHLB stock.

The decrease in average balance was primarily due to cash deployed to support the loan growth.

Interest income on other interest-earning assets decreased primarily due to a 195 basis point decrease in average yield, partially offset by a 58.0% increase in average balance.

The decrease in average yield was primarily due to the lower market rates.

The increase in average balance was primarily due to increases in deposits and other borrowings as the Company maintains most of its cash at the Federal Reserve Bank account.

For the years ended December 31, 2020 and 2019, yield on total other interest-earning assets was 0.51% and 2.46%, respectively.

Interest expense on deposits increased primarily due to a 6.4% increase in average balance and a 44 basis point increase in average cost.

The increase in average balance was primarily due to increases in time deposits, and NOW and money market accounts.

The increase in average cost was primarily due to the impact of higher average market rates on deposits and competition in the Company’s deposit target markets.

Interest expense on deposits decreased primarily due to a 2.9% decrease in average balance of interest-bearing deposits and a 90 basis point decrease in average cost of interest-bearing deposits.

The decrease in average balance was primarily due to a decrease in time deposits, partially offset by increases in savings, NOW and money market accounts.

The decrease in average cost was primarily due to the lower market rates.

For the years ended December 31, 2020 and 2019, average cost on total interest-bearing deposits was 1.19% and 2.09%, respectively.

Interest expense on other borrowings decreased primarily due to a less utilization of FHLB advances.

During the year ended December 31, 2019 , the Bank did not renew the maturing borrowings of $10.0 million as the Bank maintained a sufficient level of on-balance sheet liquidity.

Interest expense on other borrowings increased primarily due to a 271.5% increase in average balance, partially offset by a 121 basis point decrease in average cost.

The decrease in average cost was primarily due to the lower market rates.

The increase in average balance was primarily due to the Company’s liquidity management plan in response to the COVID-19 pandemic.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

The following table presents the components of net interest income for the periods indicated:

Year Ended December 31,

Amount Change

Percentage Change

Year Ended December 31, Amount Change Percentage Change

($ in thousands) 2019 2018

1 unchanged sentence

Interest and fees on loans $ 85,667 $ 76,837 $ 8,830 11.5 %

Interest on tax-exempt investment securities

Interest on investment securities 3,956 3,724 232 6.2 %

7 unchanged sentences

The increase in average balance of interest-earning assets was primarily due to growth in the loan and investment security portfolios, as well as other interest-earning assets, supported by deposit growth and the capital raise completed during the year ended December 31, 2018.

The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the current rising interest rate environment.

Interest and fees increased primarily due to a 13.8% increase in average balance and a 54 basis point increase in average yield.

The increase in average balance was primarily due to organic loan growth across the entire loan portfolio primarily in residential property, commercial property, and commercial term and lines of credit.

The increase in average yield was primarily due to the increase in market rates, which in turn was driven largely by increases in the federal funds rate.

The increase in average balance of interest-earning assets was primarily due to growth in the loan and investment security portfolios, supported by deposit growth.

The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to higher average market rates in 2019.

Interest and fees on loans increased primarily due to a 9.4% increase in average balance and a 11 basis point increase in average yield.

The increase in average balance was primarily due to organic loan growth primarily in commercial property loans and commercial lines of credit.

The increase in average yield was primarily due to the rising interest rate environment in 2018 and higher average market rates in 2019.

The Company had benefited from its high proportion of variable rate loans that had repriced along with such interest rate environment;

Interest on investment securities increased primarily due to a 4.2% increase in average balance and a 5 basis point increase in average yield.

The Company purchased $2.1 million of securities held-to-maturity and $42.0 million of securities available-for-sale during the year ended December 31, 2018.

These purchases increased the average yield as these securities were purchased in a higher market rate environment.

The increase in average yield was primarily due to additional purchases of investment securities along with the rising interest rate environment in 2018 and higher average market rates in 2019.

The Company purchased $14.1 million and $44.0 million, respectively, of investment securities during the years ended December 31, 2019 and 2018.

For the years ended December 31, 2019 and 2018, average yield on total investment securities was 2.46% and 2.41%, respectively.

Interest income on other interest-earning assets increased primarily due to a 100.5% increase in average balance and a 62 basis point increase in average yield.

The increase in average balance was primarily due to net proceeds from the Company’s IPO of $45.0 million and an increase in deposits.

The increase in average yield was primarily due to an increase in the federal funds rate.

Interest income on other interest-earning assets increased primarily due to an 18 basis point increase in average yield, partially offset by a 2.0% decrease in average balance.

The increase in average yield was primarily due to a higher average federal funds rate in 2019, partially offset by a decrease in dividend on FHLB stock.

The decrease in average balance was primarily due to cash deployed to support the loan growth.

For the years ended December 31, 2019 and 2018, yield on total other interest-earning assets was 2.46% and 2.28%, respectively.

Interest expense on deposits increased primarily due to a 6.4% increase in average balance and a 44 basis point increase in average cost.

The increase in average balance was primarily due to an increase in time deposits, partially offset by a decrease in MMDA and NOW accounts.

The increase in average cost was primarily due to the impact of higher market rates on deposits and competition in the Company’s deposit target markets.

For the years ended December 31, 2018 and 2017, average cost on interest-bearing deposits was 1.65% and 1.12%, respectively.

Interest expense on other borrowings increased primarily due to the utilization of FHLB advances since June 2017 for liquidity management.

The increase in average balance was primarily due to increases in time deposits, and NOW and money market accounts.

The increase in average cost was primarily due to the impact of higher average market rates on deposits and competition in the Company’s deposit target markets.

For the years ended December 31, 2019 and 2018, average cost on total interest-bearing deposits was 2.09% and 1.65%, respectively.

Interest expense on other borrowings decreased primarily due to less utilization of FHLB advances.

During the year ended December 31, 2019, the Bank did not renew the maturing borrowings of $10.0 million as the Bank maintained a sufficient level of on-balance sheet liquidity.

1 unchanged sentence

Provision for loan losses was $13.2 million, $4.2 million and $1.2 million for the years ended December 31, 2020, 2019 and 2018.

The Company has recognized additional provision for loan losses primarily due to an increase in charge-offs with the increase in associated historical loss rates and organic loan growth for the year ended December 31, 2019 .

During 2019, due to a borrower's financial hardship, the Company recorded a charge-off of $2.5 million on a commercial line of credit, which was originated in 2011, with an outstanding balance of $4.0 million at the time of charge-off.

This line had an outstanding balance of $1.6 million at December 31, 2019 and the management believes that the remaining outstanding balance is well collateralized.

Due to the increased charge-offs, the reserve for unfunded commitments also increased to $301 thousand at December 31, 2019 from $139 thousand at December 31, 2018.

Provision for unfunded loan commitments was $162 thousand and $18 thousand, respectively, for the years ended December 31, 2019 and 2018 .

See further discussion in “Loans Held-For-Investment and Allowance for Loan Losses” and “Off-Balance Sheet Activities and Contractual Obligations.”

The increase in provision for loan losses was primarily due to the increase in risks associated with economic and business conditions and uncertainty, as well as the increases in special mention and classified loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020.

See further discussion in “Loans Held-For-Investment and Allowance for Loan Losses.”

Noninterest Income

1 unchanged sentence

The following table presents the components of noninterest income for the periods indicated:

Year Ended December 31,

Amount Change

Percentage Change

Year Ended December 31, Amount Change Percentage Change

($ in thousands) 2020 2019

3 unchanged sentences

Gain on sale of securities — 786 (786) (100.0) %

Other income 1,247 1,234 13 1.1 %

Total noninterest income $ 11,740 $ 11,869 $ (129) (1.1) %

Service charges and fees on deposits increased primarily due to an increase in the level of transactional based deposit accounts.

Service charges and fees on deposits decreased primarily due to a decrease in fee-based transactions.

Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets.

The increase for the year ended December 31, 2019 was primarily due to a decreased amortization of servicing assets from decreased pay-offs of loans being serviced during 2019, partially offset by a decrease in servicing income.

Servicing income decreased due to a decrease in the average balance of servicing portfolio.

Gain on sale of loans increased primarily due to an increase in sales volume.

The increase was primarily due to a decrease in amortization of servicing assets from decreased prepayments of loans being serviced.

Gain on sale of loans increased primarily due to increases in sales volume and premium.

The increase in premium on SBA loans was primarily due to the market condition and the increase in sale volume of residential property loans was primarily due to increased refinancing activities during the year ended December 31, 2020.

The Company sold SBA loans of $89.8 million with a gain of $6.0 million and residential property loans of $51.9 million with a gain of $489 thousand during the year ended December 31, 2020.

During the year ended December 31, 2018 , the Company sold SBA loans of $91.7 million with a gain of $5.3 million , residential property loans of $11.6 million with a gain of $220 thousand , and other loans of $1.9 million with a gain of $62 thousand .

During the year ended December 31, 2019, the Company sold SBA loans of $99.6 million with a gain of $5.9 million and residential property loans of $10.1 million with a gain of $81 thousand.

The Company sold securities available-for-sale of $32.8 million during the year ended December 31, 2019, while the Company did not sell any securities for the year ended December 31, 2020.

2 unchanged sentences

The following table presents the components of noninterest income for the periods indicated:

Year Ended December 31,

Amount Change

Percentage Change

Year Ended December 31, Amount Change Percentage Change

($ in thousands) 2019 2018

2 unchanged sentences

Gain on sale of loans 5,996 5,560 436 7.8 %

Gain on sale of securities available-for-sale 786 — 786 — %

Other income 1,234 1,234 — — %

Total noninterest income $ 11,869 $ 10,454 $ 1,415 13.5 %

Service charges and fees on deposits increased primarily due to an increase in the level of transactional based deposit accounts.

Loan servicing income decreased primarily due to an increased amortization of servicing assets from increased pay-offs of loans being serviced during the year ended December 31, 2018, partially offset by an increase in servicing income.

Servicing income increased due to an increase in the average balance of servicing portfolio.

Gain on sale of loans decreased primarily due to decreases in sales volume and premiums on SBA loans.

The Company sold SBA loans of $91.7 million with a gain of $5.3 million, residential property loans of $11.6 million with a gain of $220 thousand, and other loans of $1.9 million with a gain of $62 thousand during the year ended December 31, 2018.

During the year ended December 31, 2017, the Company sold SBA loans of $127.3 million with a gain of $8.9 million and residential property loans of $12.4 million with a gain of $131 thousand.

Loan servicing income increased primarily due to a decreased amortization of servicing assets from decreased prepayments of loans being serviced, partially offset by a decrease in servicing income.

Servicing income decreased due to a decrease in the average balance of servicing portfolio.

Gain on sale of loans increased primarily due to an increase in sales volume.

The Company sold SBA loans of $99.6 million with a gain of $5.9 million and residential property loans of $10.1 million with a gain of $81 thousand during the year ended December 31, 2019.

During the year ended December 31, 2018, the Company sold SBA loans of $91.7 million with a gain of $5.3 million, residential property loans of $11.6 million with a gain of $220 thousand, and other loans of $1.9 million with a gain of $62 thousand.

The Company sold securities available-for-sale of $32.8 million during the year ended December 31, 2019, while the Company did not sell any securities for the year ended December 31, 2018.

Other income included wire and remittance fees of $515 thousand and $472 thousand, respectively, and debit card interchange fees of $272 thousand and $221 thousand, respectively, for the years ended December 31, 2019 and 2018.

2 unchanged sentences

The following table presents the components of noninterest expense for the periods indicated:

Year Ended December 31,

Amount Change

Percentage Change

Year Ended December 31, Amount Change Percentage Change

($ in thousands) 2020 2019

8 unchanged sentences

Total noninterest expense $ 41,699 $ 42,315 $ (616) (1.5) %

Salaries and employee benefits increased primarily due to the hiring of new experienced employees with higher salaries in order to support the expansion of the Company's infrastructure for being a public company and to enhance the controls and processes on BSA/AML compliance, partially offset by a decrease in bonus accrual.

Salaries and employee benefits increased primarily due to increases in wages, other employee benefits and vacation accrual, partially offset by a direct loan origination cost of $1.1 million related to SBA PPP loan production and a decrease in bonus accrual.

The number of full-time equivalent employees averaged 251.8 for the year ended December 31, 2020 compared to 250.2 for the year ended December 31, 2019.

Occupancy and equipment expense increased primarily due to an establishment of new loan production office in Artesia, California in December 2018 and an increase in equipment maintenance expense.

Professional fees increased primarily due to increases in audit and other professional fees for being a public company and expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs, partially offset by decreases in legal and professional fees attributed to the portion of expenses related the Company's initial public offering in 2018 that were not capitalized.

Marketing and business promotion expense decreased primarily due to a less advertisement activities for the year ended December 31, 2019.

Occupancy and equipment expense increased primarily due to increases in rent and equipment maintenance expenses.

Professional fees decreased primarily due to a decrease in expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs.

The consent order with the FDIC and CDFPI related to the BSA/AML compliance was terminated on September 30, 2020.

Marketing and business promotion expense decreased primarily due to fewer marketing activities related to the COVID-19 pandemic for the year ended December 31, 2020.

Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and transactions.

Director fees and expenses decreased primarily due to a fewer number of directors for the year ended December 31, 2019 .

Regulatory assessment expense increased primarily due to an increase in assessment rate from the consent order relating to the Bank’s compliance with BSA/AML, partially offset by a small bank assessment credit of $345 thousand from the FDIC during the year ended December 31, 2019 .

Other expense decreased primarily due to a $577 thousand reimbursement paid to SBA in 2018, partially offset by increases in other loan related legal expenses as well as the increase in provision for unfunded loan commitments.

Other loan related legal expenses were $486 thousand and $353 thousand, respectively, and provision for unfunded loan commitments was $162 thousand and $18 thousand, respectively, for the years ended December 31, 2019 and 2018 .

Other expenses also included office expense of $1.7 million and $1.6 million, respectively, and armed guard expense of $555 thousand and $504 thousand, respectively, for the years ended December 31, 2019 and 2018 , respectively.

Director fees and expenses decreased primarily due to the Company's Board of Directors decision to temporarily decrease director fees from the second quarter of 2020, partially offset by a severance payment of $45 thousand for a former director during the three months end March 31, 2020.

Regulatory assessment expense increased primarily due to a small bank credit of $345 thousand received from the FDIC during the year ended December 31, 2019, as well as an increase in balance sheet.

Other expense decreased primarily due to decreases in office expenses, provision for unfunded loan commitments, other loan related legal expenses, and armed guard expenses.

Other expenses included office expenses of $1.4 million and $1.7 million, respectively, provision (reversal) for unfunded loan commitments was $(63) thousand and $162 thousand, respectively, Other loan related legal expenses were $426 thousand and $486 thousand, respectively, and armed guard expense of $506 thousand and $555 thousand, respectively, for the years ended December 31, 2020 and 2019, respectively.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

The following table presents the components of noninterest expense for the periods indicated:

Year Ended December 31,

Amount Change

Percentage Change

Year Ended December 31, Amount Change Percentage Change

($ in thousands) 2019 2018

8 unchanged sentences

Total noninterest expense $ 42,315 $ 40,226 $ 2,089 5.2 %

Salaries and employee benefits increased primarily due to an increase in the number of employees to support continued growth, as well as annual salary increases.

The number of full-time equivalent employees averaged 250.2 for the year ended December 31, 2019 compared to 235.0 for the year ended December 31, 2018.

Occupancy and equipment expense increased primarily due to the opening of a New York branch in September 2017.

Professional fees increased primarily due to increased audit and other professional services as the Company became a public company and additional expenses related to the listing of the Company’s shares of common stock on the Nasdaq Global Select Market during the year ended December 31, 2018.

Marketing and business promotion expense increased primarily due to continuing efforts to grow exposure to the market, which the Company believes would help the growth of loans and deposits.

Occupancy and equipment expense increased primarily due to an establishment of new loan production office in Artesia, California in December 2018 and an increase in equipment maintenance expense.

Marketing and business promotion expense decreased primarily due to a less advertisement activities for the year ended December 31, 2019.

Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and transactions.

Director fees and expenses increased primarily due to the increase in directors’ fee and two additional board members each since April 2017 and January 2018.

Loan related expense decreased primarily due to a decrease in SBA guarantee fee paid.

Regulatory assessment expense increased primarily due to the Bank’s balance sheet growth.

Other expense increased primarily due to an increase in general operating expenses and a one-time expense of $577 thousand for a reimbursement for a SBA loan guarantee previously paid by the SBA on a loan originated in 2007 that subsequently defaulted and was ultimately determined to be ineligible for the SBA guaranty.

Other than the reimbursement to the SBA, other expenses primarily included office expense of $1.6 million and $1.3 million, respectively, and armed guard expense of $504 thousand and $433 thousand, respectively, for the years ended December 31, 2018 and 2017, respectively.

Director fees and expenses decreased primarily due to a fewer number of directors for the year ended December 31, 2019.

Other expense decreased primarily due to a write-off related to a $577 thousand reimbursement paid to SBA in 2018, partially offset by increases in other loan related legal expenses as well as the increase in provision for unfunded loan commitments.

Income Tax Expense

Income tax expense was $6.8 million, $10.2 million and $10.4 million, respectively, and the effective tax rate was 29.7%, 29.8% and 30.1%, respectively, for the years ended December 31, 2020, 2019 and 2018.

The decreases in effective tax rate for the years ended December 31, 2019 and 2018 compared to the year ended December 31, 2017 were primarily due to a decrease in the federal statutory tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act, which became effective on January 1, 2018 and the revaluation of deferred tax assets and liabilities of $1.6 million from the Tax Cuts and Jobs Act in 2017.

Financial Condition

Investment Securities

The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk.

The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions.

The Company’s investment securities are classified as held-to-maturity or available-for-sale in accordance with GAAP.

Investment securities that the Company has the ability and the intent to hold to maturity are classified as held-to-maturity.

All other securities are classified as available-for-sale.

Investment securities classified as held-to-maturity are carried at amortized cost.

Investment securities classified as available-for-sale are carried at their estimated fair values with the changes in fair values recorded in accumulated other comprehensive income (loss), net of tax, as a component of shareholders’ equity.

The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:

($ in thousands)

Amortized Cost

Unrealized Gain (Loss)

Amortized Cost

($ in thousands) Amortized Cost Fair Value

Unrealized Gain (Loss) Amortized Cost Fair Value

Unrealized Gain (Loss)

12 unchanged sentences

Total securities held-to-maturity $ — $ — $ — $ 20,154 $ 20,480 $ 326

Total carrying value of investment securities were $117.7 million at December 31, 2019 , a decrease of $51.0 million , or 30.2% , from $168.8 million at December 31, 2018 .

The decrease was primarily due to the sale of $32.8 million of investment securities available-for-sale, principal paydowns and calls of $33.7 million and net premium amortization of $883 thousand , partially offset by purchases of $14.1 million and an increase in fair value of securities available-for-sale of $2.3 million .

In accordance with FASB Accounting Standard Codification (“ASC”) 320, Investments - Debt and Equity Securities , the Company performs an OTTI assessment at least on a quarterly basis.

OTTI is recognized when fair value is below the amortized cost where:

(i) an entity has the intent to sell the security;

(ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis;

or (iii) an entity does not expect to recover the entire amortized cost basis of the security.

On June 30, 2020, the Company transferred securities held-to-maturity to securities available-for-sale as a part of the Company’s liquidity management plan in response to the COVID-19 pandemic.

Management determined that its securities held-to-maturity no longer adhere to the Company’s current liquidity management plan and could be sold to potentially improve the Company’s liquidity position.

Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company’s ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years from the date of transfer.

The Company transferred all securities held-to-maturity of $18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $787 thousand.

Total carrying value of investment securities were $120.5 million at December 31, 2020, an increase of $2.8 million, or 2.4%, from $117.7 million at December 31, 2019.

The increase was primarily due to purchases of $39.4 million and an increase in fair value of securities available-for-sale of $2.9 million, partially offset by principal paydowns and calls of $38.5 million and net premium amortization of $938 thousand.

All individual securities in a continuous unrealized loss position for 12 months or more as of December 31, 2020 and December 31, 2019 had an investment grade rating upon purchase.

4 unchanged sentences

The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of December 31, 2020:

Within One Year

More than One Year through Five Years

More than Five Years through Ten Years

More than Ten Years

($ in thousands)

Amortized Cost

Weighted-Average Yield

Amortized Cost

Weighted-Average Yield

Amortized Cost

Weighted-Average Yield

Amortized Cost

Weighted-Average Yield

Amortized Cost

Weighted-Average Yield

December 31, 2020

Within One Year More than One Year through Five Years More than Five Years through Ten Years More than Ten Years Total

($ in thousands) Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield

Securities available-for-sale:

6 unchanged sentences

Total securities available-for-sale $ — — % $ 3,691 2.09 % $ 24,995 1.11 % $ 89,275 1.55 % $ 117,961 1.47 %

Securities held-to-maturity:

government agency and U.S.

government sponsored enterprise mortgage-backed securities

Municipal bonds

Total securities held-to-maturity

Loans Held-For-Sale

Loans held-for-sale are carried at the lower of cost or fair value.

When a determination is made at the time of commitment to originate as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s management evaluation processes, including asset/liability management and credit risk management.

When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value.

Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses.

The following table presents the composition of the Company’s loans held-for-sale as of the dates indicated:

($ in thousands)

Real estate loans:

Residential property

Total real estate loans

Commercial and industrial loans:

SBA commercial term

Total commercial and industrial loans

Loans held-for-sale

Loans held-for-sale were $2.0 million at December 31, 2019 , a decrease of $3.8 million , or 65.8% , from $5.8 million at December 31, 2018 .

The decrease was primarily due to sales of $109.7 million , partially offset by originations of $105.2 million and transfers from loans held-for-investment of $824 thousand .

Loans Held-For-Investment and Allowance for Loan Losses

The following table presents the composition of the Company’s loans held-for-investment as of the dates indicated:

($ in thousands)

Percentage to Total

2020 2019 2018 2017 2016

($ in thousands) Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total

Real estate loans:

1 unchanged sentence

Residential property 198,431 12.5 % 235,046 16.3 % 233,816 17.5 % 168,560 14.2 % 140,419 13.6 %

SBA property 126,570 8.0 % 129,837 8.9 % 120,939 9.0 % 131,740 11.1 % 105,221 10.2 %

Construction 15,199 1.0 % 19,164 1.3 % 27,323 2.0 % 23,117 1.9 % 14,973 1.5 %

Total real estate loans 1,220,936 77.0 % 1,187,061 81.9 % 1,091,487 81.6 % 985,448 82.7 % 857,005 83.1 %

3 unchanged sentences

SBA commercial term 21,878 1.4 % 25,332 1.7 % 27,147 2.0 % 30,376 2.6 % 26,643 2.6 %

SBA PPP 135,654 8.6 % — — % — — % — — % — — %

Total commercial and industrial loans 340,869 21.6 % 240,480 16.5 % 221,274 16.5 % 170,529 14.4 % 140,235 13.6 %

Other consumer loans

21,773 1.4 % 23,290 1.6 % 25,921 1.9 % 34,022 2.9 % 33,872 3.3 %

Loans held-for-investment

1,583,578 100.0 % 1,450,831 100.0 % 1,338,682 100.0 % 1,189,999 100.0 % 1,031,112 100.0 %

Allowance for loan losses

(26,510) (14,380) (13,167) (12,224) (11,320)

Net loans held-for-investment

$ 1,557,068 $ 1,436,451 $ 1,325,515 $ 1,177,775 $ 1,019,792

Loans held-for-investment were $1.58 billion at December 31, 2020, an increase of $132.7 million, or 9.1%, from $1.45 billion at December 31, 2019.

The increase was primarily due to new funding of $381.0 million and advances of $109.2 million , partially offset by paydowns and payoffs of $373.6 million , transfers to loans held-for-sale of $824 thousand and charge-offs of $3.6 million .

The increase was primarily due to new funding of $345.9 million, advances of $100.5 million, and transfers from loan held-for-sale of $697 thousand, partially offset by paydowns and payoffs of $311.5 million, transfers to loans held-for-sale of $1.4 million and charge-offs of $1.5 million.

SBA PPP loan production contributed significantly to the Company’s loan growth for the year ended December 31, 2020.

The following table shows the contractual maturities of loans held-for-investment and the distribution between fixed and floating interest rate loans at December 31, 2020:

($ in thousands)

Within One Year

Due After One Year to Five Years

Due After Five Years

December 31, 2020

($ in thousands) Within One Year Due After One Year to Five Years Due After Five Years Total

Real estate loans:

1 unchanged sentence

Residential property — — 198,431 198,431

SBA property — 53 126,517 126,570

Construction 15,199 — — 15,199

Total real estate loans 110,549 595,071 515,316 1,220,936

3 unchanged sentences

SBA commercial term 51 4,373 17,454 21,878

SBA PPP — 135,654 — 135,654

Total commercial and industrial loans 99,098 197,827 43,944 340,869

2 unchanged sentences

Loans with variable (floating) interest rates

$ 186,476 $ 323,127 $ 242,310 $ 751,913

Loans with adjustable (fixed to floating) interest rates — 35,006 294,087 329,093

Loans with predetermined (fixed) interest rates 25,606 453,252 23,714 502,572

The Company had benefited from its high proportion of variable rate loans that had repriced along with such interest rate environment;

however, the Company strategically had increased the proportion of fixed rate loans to 43.4% at December 31, 2019 from 34.4% at December 31, 2018 in order to better-position its balance sheet to match the current and potential future interest rate environment.

Total $ 212,082 $ 811,385 $ 560,111 $ 1,583,578

SBA Paycheck Protection Program

The following table presents a summary of SBA PPP loans as of December 31, 2020:

December 31, 2020

($ in thousands) Number of Loans Carrying Value Contractual Balance

$50,000 or less 1,017 $ 20,518 $ 20,632

Over $50,000 and less than $350,000 496 60,692 62,011

Over $350,000 and less than $2,000,000 69 46,054 46,718

$2,000,000 or more 3 8,390 8,427

Total 1,585 $ 135,654 $ 137,788

Loan Modifications Related to the COVID-19 Pandemic

The following table presents a summary of loans under modified terms related to the COVID-19 pandemic as of December 31, 2020:

December 31, 2020

Modification Type

($ in thousands) Payment Deferment Interest Only Payment Total Weighted-Average Contractual Rate Loan-to-Value (1)

Accrued Interest Receivable

Real estate loans:

Commercial property

$ 9,688 $ 14,444 $ 24,132 4.10 % 44.2 % $ 151

Residential property

425 — 425 4.75 % 65.5 % 12

SBA property — 4,192 4,192 4.79 65.5 % 26

Commercial and industrial loans:

Commercial term

2,462 3,065 5,527 3.88 % 98

SBA commercial term — 1,841 1,841 5.41 % 7

$ 12,575 $ 23,542 $ 36,117 4.22 % $ 294

Loans held-for-investment $ 1,583,578

SBA PPP loans 135,654

Loans held-for-investment, excluding SBA PPP loans $ 1,447,924

Total loans under modified terms related to the COVID-19 pandemic to loans held-for-investment, excluding SBA PPP loans

(1) Collateral value at origination

All of these loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs.

The following table presents a summary of remaining modifications terms of loans under modified terms related to the COVID-19 pandemic as of December 31, 2020:

December 31, 2020

Remaining Terms of

($ in thousands) Three Months or Less Three to Six Months Seven Months Total

Real estate loans:

Commercial property $ 15,150 $ 8,982 $ — $ 24,132

Residential property 425 — — 425

SBS property — 4,192 — 4,192

Commercial and industrial loans:

Commercial term 2,462 1,900 1,165 5,527

SBA commercial term — 1,550 291 1,841

Total $ 18,037 $ 16,624 $ 1,456 $ 36,117

The following table presents a summary of loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of December 31, 2020:

December 31, 2020

($ in thousands) Carrying Value Accrued Interest Receivable

Real estate loans:

Commercial property

$ 349,006 $ 4,308

Residential property

Commercial and industrial loans:

Commercial term

Other consumer loans 1,256 5

$ 437,865 $ 5,239

The Company started providing modifications related to the COVID-19 pandemic during the three months ended June 30, 2020.

The following table presents activity in loans under modified terms related to the COVID-19 pandemic for the six months ended December 31, 2020.

Real Estate Loans Commercial and Industrial Loans

($ in thousands) Commercial Property Residential Property SBA Property Commercial Term SBA Commercial Term Other Consumer Loans Total

Balance at July 1, 2020 $ 379,566 $ 44,804 $ — $ 58,159 $ — $ 1,507 $ 484,036

Modification early terminated (1)

(67,996) (1,019) — (24,734) — (4) (93,753)

Modification expired (291,983) (40,053) — (27,748) (72) (1,252) (361,108)

Subsequent modification 10,973 425 — 5,527 72 — 16,997

New modification 14,269 260 4,192 — 1,841 6 20,568

Amortization (20,697) (3,992) — (5,677) — (257) (30,623)

Balance at December 31, 2020 $ 24,132 $ 425 $ 4,192 $ 5,527 $ 1,841 $ — $ 36,117

(1) Termination of modifications at the request of the borrower.

Allowance for loan losses

The following table reflects allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:

($ in thousands)

Allowance for Loan Losses

Percentage of Loans to Total Loans

Allowance for Loan Losses

Percentage of Loans to Total Loans

Allowance for Loan Losses

Percentage of Loans to Total Loans

Allowance for Loan Losses

Percentage of Loans to Total Loans

Allowance for Loan Losses

Percentage of Loans to Total Loans

2020 2019 2018 2017 2016

($ in thousands) Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans

Real estate loans:

1 unchanged sentence

Residential property 2,680 12.5 % 1,167 16.3 % 1,152 17.5 % 833 14.2 % 674 13.6 %

SBA property 2,179 8.0 % 1,446 8.9 % 1,225 9.0 % 1,124 11.1 % 801 10.2 %

Construction 225 1.0 % 299 1.3 % 511 2.0 % 184 1.9 % 118 1.5 %

Total real estate loans 18,894 77.0 % 9,854 81.9 % 9,104 81.6 % 8,507 82.7 % 7,497 83.1 %

3 unchanged sentences

SBA commercial term 773 1.4 % 701 1.7 % 909 2.0 % 909 2.6 % 990 2.6 %

SBA PPP — 8.6 % — — % — — % — — % — — %

Total commercial and industrial loans 7,222 21.6 % 4,354 16.5 % 3,877 16.5 % 3,548 14.4 % 3,657 13.6 %

Other consumer loans 394 1.4 % 172 1.6 % 186 1.9 % 169 2.9 % 166 3.3 %

The overall increase in allowance for loan losses for the year ended December 31, 2019 was primarily due to an increase in historical loss rates from the increase in charge-offs and the organic loan growth.

During the year ended December 31, 2019 , due to the borrower's financial hardship, the Company recorded a charge-off of $2.5 million on a commercial line of credit, which was originated in 2011, with an outstanding balance of $4.0 million at the time of charge-off.

This line had an outstanding balance of $1.6 million at December 31, 2019 and the management believes that the remaining outstanding balance is well collateralized.

Total $ 26,510 100.0 % $ 14,380 100.0 % $ 13,167 100.0 % $ 12,224 100.0 % $ 11,320 100.0 %

The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account.

The Company considered the SBA guarantee in the allowance for loan losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans at December 31, 2020.

The increase in allowance for loan losses was primarily due to increased risks associated with economic and business conditions, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020.

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs as of the dates or for the periods indicated:

3 unchanged sentences

Balance at beginning of year $ 14,380 $ 13,167 $ 12,224 $ 11,320 $ 9,345

Real estate 175 31 381 168 —

Commercial and industrial 1,104 3,350 272 1,320 729

1 unchanged sentence

Total charge-offs

1,529 3,579 1,009 1,576 767

Recoveries on loans previously charged off

Real estate 58 6 213 1 1

Commercial and industrial 236 378 356 580 406

1 unchanged sentence

Total recoveries

440 555 721 653 459

Net charge-offs 1,089 3,024 288 923 308

Provision (reversal) for loan losses

Provision for loan losses 13,219 4,237 1,231 1,827 2,283

Balance at end of year $ 26,510 $ 14,380 $ 13,167 $ 12,224 $ 11,320

9 unchanged sentences

Residential property $ 182 $ 697 $ 95 $ 1,045 $ —

SBA property — 794 183 — —

Total real estate loans 182 1,491 278 1,045 —

5 unchanged sentences

Other consumer loans 156 138 99 294 115

The increase in loans past due for the year ended December 31, 2019 was primarily due to two SBA property loans with an aggregated outstanding balance of $793 thousand and a residential property loan with an outstanding balance of $698 thousand that became past due during the year ended December 31, 2019 .

Total $ 338 $ 1,818 $ 377 $ 1,341 $ 2,094

Nonperforming Loans and Nonperforming Assets

5 unchanged sentences

Residential property 189 — 302 730 —

SBA property 885 442 540 1,810 602

Total real estate loans 1,598 442 842 2,858 659

6 unchanged sentences

Total nonaccrual loans

3,163 2,537 1,061 3,234 1,848

Loans past due 90 days or more still on accrual — 287 — — —

Total nonperforming loans

3,163 2,824 1,061 3,234 1,848

Other real estate owned

1,401 — — 99 506

Total nonperforming assets

$ 4,564 $ 2,824 $ 1,061 $ 3,333 $ 2,354

Nonperforming loans to loans held-for-investment

0.20 % 0.19 % 0.08 % 0.27 % 0.18 %

Nonperforming assets to total assets

Total nonaccrual loans were $2.5 million at December 31, 2019 , an increase of $1.5 million , or 139.1% , from $1.1 million at December 31, 2018 .

The increase was primarily due to loans placed on nonaccrual status during the year ended December 31, 2019 of $3.2 million , which included the line with an outstanding balance of $1.6 million at December 31, 2019 that had the $2.5 million charge-off during 2019, partially offset by payoffs and paydowns of $1.4 million and charge-offs of $2.7 million .

The Company also had a SBA commercial term loan past due 90 days or more and still accruing, which management believes that the loan is well secured and the Bank is in the process of collection.

0.24 % 0.16 % 0.06 % 0.23 % 0.19 %

Total nonaccrual loans were $3.2 million at December 31, 2020, an increase of $626 thousand, or 24.7%, from $2.5 million at December 31, 2019.

The increase was primarily due to loans placed on nonaccrual status during the year ended December 31, 2020 of $2.8 million, partially offset by payoffs and paydowns of $915 thousand and charge-offs of $1.3 million.

Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection.

7 unchanged sentences

As of December 31, 2020, using regulatory definitions in the CRE Concentration Guidance, CRE loans represented 256.1% of total risk-based capital, as compared to 243.6%, 253.6%, 355.1% and 352.1% as of December 31, 2019, 2018, 2017 and 2016, respectively.

The reduction in CRE concentration ratio was primarily due to the additional capital from the Company’s IPO during the year ended December 31, 2019 .

The reduction in CRE concentration ratio in 2018 was primarily due to the additional capital from the Company’s IPO during the year ended December 31, 2018.

The management believes that the Bank has a robust risk management framework in place for CRE concentration issues including board approved CRE concentration contingency plans.

9 unchanged sentences

Commercial property $ 333 $ 339 $ — $ 318 $ 435

SBA property 275 415 315 1,373 1,540

Total real estate loans 608 754 315 1,691 1,975

4 unchanged sentences

Total commercial and industrial loans 31 67 248 576 884

Other consumer loans

$ 639 $ 821 $ 563 $ 2,267 $ 2,859

Total nonaccrual TDRs, included above

Total TDRs were $821 thousand at December 31, 2019 , an increase of $258 thousand , or 45.8% , from $563 thousand at December 31, 2018 .

The increase was primarily due to new TDRs of $610 thousand , partially offset by payoffs and paydowns of $224 thousand and charge-offs of $128 thousand .

$ 5 $ 121 $ 131 $ 1,675 $ 663

Total TDRs were $639 thousand at December 31, 2020, a decrease of $182 thousand, or 22.2%, from $821 thousand at December 31, 2019.

The decrease was primarily due to payoffs and paydowns of $86 thousand and charge-offs of $133 thousand, partially offset by new TDRs of $37 thousand.

Loans Held-For-Sale

Loans held-for-sale are carried at the lower of cost or fair value.

When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value.

Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses.

The following table presents the composition of the Company’s loans held-for-sale as of the dates indicated:

($ in thousands) 2020 2019 2018 2017 2016

Real estate loans:

Residential property $ 300 760 $ — $ 270 —

SBA property 1,411 150 5,481 3,857 —

Commercial and industrial loans:

SBA commercial term 268 1,065 300 1,170 2,150

Loans held-for-sale

$ 1,979 1,975 $ 5,781 $ 5,297 2,150

Loans held-for-sale were $2.0 million at December 31, 2020, an increase of $4 thousand, or 0.2%, from $2.0 million at December 31, 2019.

The increase was primarily due to originations of $141.2 million and transfers from loans held-for-investment of $1.4 million, partially offset by sales of $141.7 million and a transfer to loans held-for-investment of $697 thousand.

The Bank gathers deposits primarily through its branch locations.

The Bank offers a variety of deposit products including demand deposits accounts, NOW and money market accounts, savings accounts and time deposits.

The following table presents summary of the Company’s deposit as of the dates indicated:

December 31, Amount Change Percentage Change

($ in thousands) 2020 2019

Noninterest-bearing demand deposits

$ 538,009 $ 360,039 $ 177,970 49.4 %

Interest-bearing deposits:

10,481 6,492 3,989 61.4 %

21,604 17,673 3,931 22.2 %

Retail money market accounts

351,739 307,980 43,759 14.2 %

Brokered money market accounts

25,002 30,034 (5,032) (16.8) %

Retail time deposits of:

$250,000 or less

299,431 405,004 (105,573) (26.1) %

More than $250,000

168,683 199,726 (31,043) (15.5) %

Time deposits from internet rate service providers

24,902 — 24,902 — %

Brokered time deposits

55,000 62,359 (7,359) (11.8) %

Time deposits from California State Treasurer

100,000 90,000 10,000 11.1 %

Total interest-bearing deposits

1,056,842 1,119,268 (62,426) (5.6) %

Total deposits

$ 1,594,851 $ 1,479,307 $ 115,544 7.8 %

The increase in noninterest-bearing demand deposits was primarily due to the overall liquid deposit market.

A total of $117.9 million of SBA PPP loans were funded through the Bank's noninterest-bearing demand deposits and deposit customers also received $93.5 million of SBA Economic Injury Disaster Loans during the past 9-month period.

The decrease in retail time deposits was primarily due to matured and closed accounts of $639.5 million, partially offset by new accounts of $97.0 million and renewals of the matured accounts of $391.7 million.

As of December 31, 2020 and 2019, total deposits were comprised of 33.7% and 24.3%, respectively, of noninterest-bearing demand accounts, 25.7% and 24.5%, respectively, of savings, NOW and money market accounts and 40.6% and 51.2%, respectively, of time deposits.

Total deposits were $1.48 billion at December 31, 2019 , an increase of $35.6 million , or 2.5% , from $1.44 billion at December 31, 2018 .

The increase was primarily due to increases in savings, NOW and money market accounts of $48.6 million , and noninterest-bearing demand accounts of $30.8 million , partially offset by a decrease in time deposits of $43.8 million .

The increase in savings, NOW and money market accounts included brokered money market accounts $30.0 million at December 31, 2019 , which the Company began utilizing in order to diversify its funding source during the year ended December 31, 2019 .

Time deposits from California State Treasurer totaled $90.0 million and $100.0 million , respectively, and brokered time deposits totaled $62.4 million and $42.5 million , respectively, at December 31, 2019 and 2018 .

The following table presents the maturity of time deposits as of the dates indicated:

($ in thousands)

Three Months or Less

Three to Six Months

Six Months to One Year

One to Three Years

Over Three Years

($ in thousands) Three Months or Less Three to Six Months Six Months to One Year One to Three Years Over Three Years Total

December 31, 2020

Time deposits less than $100,000

$ 83,751 $ 18,482 $ 32,112 $ 7,975 $ 1,528 $ 143,848

Time deposits of $100,000 through $250,000

91,727 57,715 81,622 4,421 — 235,485

Time deposits of more than $250,000

156,507 35,000 72,553 4,623 — 268,683

Total $ 331,985 $ 111,197 $ 186,287 $ 17,019 $ 1,528 $ 648,016

December 31, 2019

Time deposits less than $100,000

$ 41,456 $ 29,899 $ 92,695 $ 10,165 $ 1,557 $ 175,772

Time deposits of $100,000 through $250,000

111,182 53,198 121,674 5,537 — 291,591

Time deposits of more than $250,000

Other Borrowings

FHLB advances

Other than deposits, the Company also utilized FHLB advances as a supplementary funding source to finance operations.

FHLB advances are collateralized by commercial property loans.

At December 31, 2019 and 2018 , total borrowings were $20.0 million and $30.0 million , respectively.

167,825 38,740 77,334 5,827 — 289,726

Total $ 320,463 $ 121,837 $ 291,703 $ 21,529 $ 1,557 $ 757,089

Shareholders’ Equity and Regulatory Capital

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The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators.

As discussed in Supervision and Regulation, based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to remain as such to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements.

At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

The Company is not currently subject to separate minimum capital measurements under the definition of a “Small Bank Holding Company.” At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

Federal banking agencies also require a capital conservation buffer of 2.50% in addition to the ratios required to generally be considered “adequately capitalized” under the PCA regulations.

Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

Under capital adequacy guidelines and the regulatory framework for PCA (described below), the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.

In the wake of the global financial crisis of 2008 and 2009, the role of capital has become fundamentally more important, as banking regulators have concluded that the amount and quality of capital held by banking organizations was insufficient to absorb losses during periods of severely distressed economic conditions.

The Dodd-Frank Act and new banking regulations promulgated by the U.S.

federal banking regulators to implement Basel III have established strengthened capital standards for banks and bank holding companies and require more capital to be held in the form of common stock.

These provisions impose meaningfully more stringent regulatory capital requirements.

In addition, the Basel III regulations will implement a concept known as the “capital conservation buffer.” In general, banks and bank holding companies are required to hold a buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets over each minimum capital ratio to avoid being subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers.

For community banks, the capital conservation buffer requirement commenced on January 1, 2016, with a gradual phase-in.

Full compliance with the capital conservation buffer was required by January 1, 2019.

As of December 31, 2019 and 2018 , the Bank met the fully phased-in Basel III capital requirements.

The table below summarizes the minimum capital requirements applicable to the Bank pursuant to Basel III regulations as of the dates reflected, and exclusive of the capital conservation buffer as of December 31, 2019 and 2018 .

The minimum capital requirements are only regulatory minimums and banking regulators can impose higher requirements on individual institutions.

For example, banks and bank holding companies experiencing internal growth or making acquisitions generally will be expected to maintain strong capital positions substantially above the minimum supervisory levels.

Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations.

The table below also summarizes the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of December 31, 2019 and 2018 .

The Bank exceeded all regulatory capital requirements under Basel III and were considered to be “well-capitalized” as of the dates reflected in the table below.

Under capital adequacy guidelines and the regulatory framework for the PCA, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.

In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of December 31, 2020 and 2019.

For comparison purpose, the Company’s ratios are included as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.

Pacific City Bank

Minimum Regulatory Requirements

Well Capitalized Requirements (Bank)

PCB Bancorp Pacific City Bank Minimum Regulatory Requirements Well Capitalized Requirements (Bank)

December 31, 2020

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Tier 1 capital (to average assets) 13.23 % 13.06 % 4.0 % 5.0 %

The Basel III regulations also revise the definition of capital and describe the capital components and eligibility criteria for common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital.

The most significant changes to the capital criteria are that:

(i) the prior concept of unrestricted Tier 1 capital and restricted Tier 1 capital has been replaced with additional Tier 1 capital and a regulatory capital ratio that is based on common equity Tier 1 capital;

and (ii) trust preferred securities and cumulative perpetual preferred stock issued after May 19, 2010 no longer qualify as Tier 1 capital.

This change is already effective due to the Dodd-Frank Act, although such instruments issued prior to May 19, 2010 continue to qualify as Tier 1 capital (assuming they qualified as such under the prior regulatory capital standards), subject to the 25% of Tier 1 capital limit.

The Company and the Bank’s capital conservation buffer was 9.22% and 8.95%, respectively, as of December 31, 2020, and 8.90% and 8.71%, respectively, as of December 31, 2019.

Liquidity refers to the measure of ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting operating, capital and strategic cash flow needs, all at a reasonable cost.

8 unchanged sentences

To the extent the Company is unable to obtain sufficient liquidity through core deposits, the Company seeks to meet its liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.

At December 31, 2019 and 2018 , the Company had $20.0 million and $30.0 million of outstanding FHLB advances, respectively.

The Company had $80.0 million and $20.0 million of outstanding FHLB advances at December 31, 2020 and 2019, respectively.

Based on the values of loans pledged as collateral, the Company had $425.3 million and $404.8 million of additional borrowing capacity with FHLB as of December 31, 2020 and 2019, respectively.

As of December 31, 2019 and 2018 , the Company had $35.0 million of available unused unsecured federal funds lines.

As of December 31, 2020 and 2019, the Company had $65.0 million and $35.0 million of available unused unsecured federal funds lines, respectively.

In addition, available unused secured borrowing capacity from Federal Reserve Discount Window at December 31, 2020 and 2019 was $35.8 million and $37.9 million, respectively.

3 unchanged sentences

As of December 31, 2020 and 2019, total cash and cash equivalents represented 10.1% and 8.4% of total assets, respectively.

On June 30, 2020, the Company also transferred securities held-to-maturity of $18.8 million to securities available-for-sale in order to secure additional liquidity on balance sheet.

As of December 31, 2020, management was able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic evidenced by the fact that as of December 31, 2020, the Company maintained $194.1 million, or 10.1% of total assets, of cash and cash equivalents and $526.1 million, or 27.4% of total assets, of available borrowing capacity.

PCB Bancorp, on a stand-alone holding company basis, must provide for its own liquidity and its main source of funding is dividends from the Bank.

16 unchanged sentences

Commitments to extend credit

$ 193,496 $ 171,608

Standby letters of credit

Commercial letters of credit

Total $ 198,281 $ 175,200

The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

3 unchanged sentences

The following table presents supplemental information regarding total contractual obligations as of the dates indicated:

($ in thousands)

Within One Year

One to Three Years

Three to Five Years

Over Five Years

($ in thousands) Within One Year One to Three Years Three to Five Years Over Five Years Total

December 31, 2020

Time deposits

$ 629,469 $ 17,019 $ 1,528 $ — $ 648,016

FHLB advances

70,000 10,000 — — 80,000

Operating leases

2,494 4,342 1,413 818 9,067

Total $ 701,963 $ 31,361 $ 2,941 $ 818 $ 737,083

December 31, 2019

Time deposits

$ 734,003 $ 21,529 $ 1,557 $ — $ 757,089

FHLB advances

10,000 10,000 — — 20,000

Operating leases

2,686 4,454 2,375 1,352 10,867

Total $ 746,689 $ 35,983 $ 3,932 $ 1,352 $ 787,956

Management believes that the Company will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels.

6 unchanged sentences

Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S.

Treasuries and LIBOR (basis risk).

Treasuries and London Interbank Offered Rate (“LIBOR”) (basis risk).

The Company’s Board ALCO establishes broad policy limits with respect to interest rate risk.

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The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

In order to better-position balance sheet to

match the current and potential future interest rate environment, the Company had increased the proportion of fixed rate loans

throughout 2019.

The Company uses two approaches to model interest rate risk:

4 unchanged sentences

The following table presents the projected changes in NII at Risk and EVE that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change as of the dates indicated:

Simulated Rate Changes

Net Interest Income Sensitivity

Economic Value of Equity Sensitivity

Net Interest Income Sensitivity

Economic Value of Equity Sensitivity

Simulated Rate Changes Net Interest Income Sensitivity Economic Value of Equity Sensitivity Net Interest Income Sensitivity Economic Value of Equity Sensitivity

+300 28.9 % 17.4 % 29.9 % 9.2 %

+200 19.4 % 13.3 % 20.3 % 7.7 %

+100 9.8 % 7.6 % 10.4 % 4.7 %

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis